Tuesday, February 02, 2016

ADAM SMITH DID NOT "FOUND" MODERN CAPITALISM

Ron A. Rhoades, JD, CFP® is an Assistant Professor of Finance and the Director of the Financial Planning Program in the Gordon Ford College of Business at Western Kentucky University. posts (Feb) in RIA BIZ

“Part II: Tick, tick ... How FINRA tramples on 'settled' principles of the Supreme Court, and even Adam Smith, in its sanctification of two-hatted advice

“Even Adam Smith, said to be the founder of modern capitalism, knew that constraints upon greed were required. While Smith saw virtue in competition, he also recognized the dangers of the abuse of economic power in his warnings about combinations of merchants and large mercantilist corporations.

Smith also recognized the necessity of professional standards of conduct, for he suggested qualifications “by instituting some sort of probation, even in the higher and more difficult sciences, to be undergone by every person before he was permitted to exercise any liberal profession, or before he could be received as a candidate for any honourable office or profit.”

As seen, “Smith embraces both the great society and the judicious hand of the paternalistic state.”

In essence, long before many of the professions became separate, specialized callings, Smith advanced the concepts of high conduct standards for those entrusted with other people’s money.”

Comment

I suspect that Ron Rhoades is unaware of Adam Smith’s actual contributions to the history of ideas about commercial societies. For example, Smith was not the “founder of modern capitalism” - even the word ‘capitalism” was not yet used while he was alive, nor was it for many decades after he died in 1790. And when the word ‘capitalism’ was first used in 1854 it referred to a very different economic phenomenon to anything envisaged by Adam Smith in the 18th century.

Moreover, when Smith wrote about the emergence of commercial society from the long centuries of farming, he was looking backwards to the past and not to the future. (In fact Adam Smith seldom looked forwards to the future - he only made one prediction about the future in Wealth Of Nations when he offered the view that in a century after 1776, the new British colonies on the American coast would become richer in wealth and population than the then dominant economy of Britain!).

That according to Rhoades, he knew “that constraints upon greed were required because “While Smith saw virtue in competition, he also recognized the dangers of the abuse of economic power in his warnings about combinations of merchants and large mercantilist corporations” is only half the story. Smith’s portrayal of commercial society is replete with the examples of the “abuse of economic power” both among the rulers and their governments and in the actions of “merchants and manufacturers”, who colluded with the ‘rulers of mankind’ in their collective and individual abuses of their offices and commercial opportunities.

Commecial interests in practise sought to abuse ‘competition” by seeking monopolies, tariffs and outright prohibitions to narrow the competition and raise prices. These trespasses on competition were normal and to some extent they still are widespread.

Capitalism is not a manifestation of Adam Smith’s creation. It remains replete with the corruption of societies familiar to Smith and to the moral defects he identified in the history of human societies that he studied and wrote about. He was not the `’founder of modern capitalism”; he was a student of what came before it.